Turn the system round to make the profligate pay

Take a close look at your energy bill. The initial amount of energy we use is charged at a higher rate. Shouldn’t the opposite occur to discourage energy waste?

“Energy efficiency is my number one policy priority”, maintains energy and climate change secretary, Edward Davey. A very sensible priority, given that the cheapest and most ecologically valuable fuel is that which we don’t use.

So, if gas and electricity charges are levied at rates that seem deliberately to discourage frugality, it must be a priority to reverse such a perverse price signal.

And perversity describes precisely how all fuel bills are calculated. Look at your own gas or electric bill. The initial kilowatt hours consumed each month are charged at around three times the price of subsequent units. The result is that those who practise careful consumption are penalised. Whereas there is effectively a volume discount on profligate energy consumption.

Now, opinion formers like Which? are overtly hammering the absurdity of thrifty consumers “paying more than a third extra per unit than someone who uses twice as much”.

Both practically, and in particular psychologically, this is no way to impress upon consumers the value of energy conservation: this is prima facie not the way to alter perceptions of value.

Paying more per unit

Equally, it is not the best way to help poorer households: Consumer Focus have found that 85 per cent of low-income households consume less energy than average, and therefore pay more per unit. With over 5m households now in fuel poverty, there is a real urgency to turn the price signals round. Instead of being many times more expensive, the initial amount of energy use should be priced at a lower rather than higher rate.

This concept, the ‘Rising Block Tariff’, could be implemented in a number of ways. As in the conventional model, energy companies could be obliged to increase the unit price of the energy they sell in a series of consumption ‘blocks’. The more you consume, the more you pay. No longer would the frugal be out of pocket.

Equally, the concept can be mimicked through providing each customer with a cheap, even free, block of energy or an annual credit on their bill. The cost to the energy supplier of these blocks or credits would be made up for in higher unit prices. Again, the fewer units you consume, the less you would pay for the average unit of energy.

Derek Lickorish, who chairs the English Fuel Poverty Advisory Group, (of which I am a member) argues that the first 700kWh of consumption should bear none of the costs from energy and climate change policy – effectively government mandated costs. The next 400kWh would attract these levies. And should a customer exceed 1,100kWh (700+400kWh) all these units plus the additional kWh consumed should attract additional levies. He draws the analogy with income tax thresholds, where those earning over £100,000 lose personal allowances.

By using regulation in this way, the proportion of funds collected to underwrite the basic needs of fuel poor households and subsidise fuel-saving measures could be increased, with impunity. No longer could it be said that these policy costs were harming the fuel poor. Instead, only the profligate would underwrite them.

Retain the right to waste

People would retain the right to use fuel wastefully, even excessively, just as now. The difference is that the more they use beyond the basic amount, the more they would pay for doing so via ever increasing kilowatt hour unit costs. Conversely, people could avoid high costs by moderating use. That moderation could be achieved by installing energy-saving measures enabling significant provision of energy services without excessive use of fuels – or simply doing without unnecessary energy services, such as plasma televisions, hot-tubs and patio heaters.

Tim Yeo is chairman of the Commons select committee overseeing Edward Davey’s department. Twenty years ago, when he was environment minister, he acknowledged the absurdity of offering lower rates for extra expenditure. He recognised that what people wanted to buy from an energy company was not a commodity, equating kilowatt hours with detergents or soap flakes. It was services like light, heat, motive power. Which could mostly be provided satisfactorily burning fewer units of power.

He pressed for the introduction of rising block tariffs. Sadly he did not succeed at the time, quite possibly because climate change and energy policy were run by different government departments. But also because the pressing need to reduce energy consumption was scarcely acknowledged politically.

Now both policies are under the same management. Now is the time to reverse these absurd incentives for profligacy.

“In 2009, the Committee on Climate Change (CCC) commissioned BRE to look into the impact of RBTs. The resulting report found that as the fuel poor (under the official definition) tended to have higher than average energy costs, the introduction of such a tariff would result in higher average bills for fuel poor households with little impact on the number of households in fuel poverty overall.84 They concluded that fuel poverty would need to be addressed through energy efficiency and other policies before this type of policy could be introduced. Whilst this study was based on the official definition, it is clear that the same conclusion would hold for the LIHC indicator”

This did not ring true to me (the firm I work for focuses on energy use in domestic properties private and social) with our extensive empirical knowledge of fuel poor households so I looked up the referenced report. This report quite clearly states on page 11 paragraph 3 that “There is some evidence that low income households use less energy than higher income household [2]. This is based upon actual consumption of energy, rather than the notional required energy as used in the modelling of fuel poverty.”

This contrasts explicitly with “The resulting report found that as the fuel poor (under the official definition) tended to have higher than average energy costs”, and surely ‘actual consumption’ is what those in fuel poverty have to pay.

Reference [2] is to a report by CSE which relies on data from the Office for National Statistics that shows a graph that “clearly demonstrates: a) the higher levels of energy expenditure associated with higher household income: the poorest 10% of households spend, on average, less than half that spent by the richest 10% of households”. Page 11 http://www.cse.org.uk/pdf/pub1085.pdf Assessing the Social Impacts of A Supplier Obligation.

Essentially Hills Fuel Poverty Review is rejecting RBTs because it claims the CCC report says those in fuel poverty will be negatively affected. In reality the CCC report says, (I paraphrase), because fuel poor people tend to live in worse housing, if they weren’t poor and could heat their homes adequately they would be negatively affected by RBTs but in reality they are poor and can’t heat their homes very well and so therefore have to either heat their homes less or spend more on heating them under a regime where there are no RBTs. Despite this their analysis is based on them being rich enough to heat their homes.